Marc Cuniberti – “Death Cross” – understandably – gets a bad rap

Don't look now but the dreaded "Death Cross" has occurred in the S&P 500 stock index.

This ominous sounding indicator is considered by many technical market analysts as an omen worth noting. The Death Cross is when the 50-day moving average of the S&P 500's closing price crosses and falls below the 200 day moving average of the same index.

This "crossover" when the 50 day moving average pierces the 200 day to the downside, forms somewhat of a cross of sorts. Actually it's just the crossing of the average which describes the event. The name is usually is preceded by the word "dreaded", as in "the dreaded Death Cross."

The theory is that the longer 200 day average is syncing up with the shorter 50 day average which then indicates a larger and more significant move to the downside is about to occur.

Before you go calling your broker and hitting the sell button with your crash helmet strapped tight, know this: there is no indicator that is foolproof nor human that is infallible that can predict in any way, shape, form, or timeframe what is about to happen in the sociological world which is the stock market.

The Death Cross did precede the two recent market implosions that were the dot.com crash in 2000 and the 2008 crisis, but the cross has also appeared near or at important stock market bottoms which means the cross was followed by healthy gains.

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So much for the "dreaded" part of the moniker.

Drilling down into how valid the indicator might be, we find 33 such Death Crosses in the S&P in the last 68 years with this latest one wearing the jersey number 34. The good news is only four of these preceded a bear market of greater than 20 percent which occurred within 24 months from when the cross appeared.

And 22 crosses preceded a gain in the index within 6 to 12 months. Averaging out all the past 33 crosses and we get a gain of about 8.6 percent a year later.

Maybe they should rename it given the average result looks to be positive and a harbinger of good things to come instead of bad.

This goes to show technical stock indicators have their place but it's a limited sized place at that. No indicator is foolproof and attaching a scary name to one doesn't make it more valid, although it may sell more newspapers.

After all, what novice would ignore a "Death Cross" either in theory or in the real world?

Only time will tell if this new cross will bear out a good or bad outcome, but it's safe to say markets don't fall forever. Not that they couldn't I suppose, but they haven't. Even the worst of markets eventually turn up, at least historically that is.

That's not to say a falling market can't do damage. Indeed this latest go around has wiped some profits from the slate and most likely from investor portfolios, and depending on what you hold, the damage and the time to recover could be significant.

Not a pleasant reality for sure. We can only hope before they plug a cross over me, the market will have recovered nicely and then some. At least that's what I'm hoping for. If I had my way, I would prefer not to have Death Crosses of any kind, either in monetary theory or planted over my final resting place, although the latter is a foregone conclusion.

Indexed reference cannot be invested in directly. Investing involves risk. You can lose money, either partially or as a full loss of principal. This article expresses the opinions of Marc Cuniberti and are opinions only and should not be construed or acted upon as individual investment advice. Mr. Cuniberti is an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Marc can be contacted at SMC Wealth Management, 164 Maple St #1, Auburn, CA 95603 (530) 559-1214. SMC and Cambridge are not affiliated. His website is http://www.moneymanagementradio.com. California Insurance License # OL34249.